Question

Grexit or Not?

When the euro was introduced in 1999, Greece was conspicuously absent from the list of the EU member countries adopting the common currency. The country was not ready. In a few short years, however, European leaders, probably motivated by their political agenda, allowed Greece to join the euro club in 2001 although it was not entirely clear if the country satisfied the entry conditions. In any case, joining the euro club allowed the Greek government, households, and firms to gain easy access to plentiful funds at historically low interest rates, ushering in a period of robust credit growth. For a while, Greeks enjoyed what seemed to be the fruits of becoming a full-fledged member of Page 61Europe. In December 2009, however, the new Greek government revealed that the government budget deficit would be 12.7 percent for 2009, not 3.7 percent as previously announced by the outgoing government, far exceeding the EU’s convergence guideline of keeping the budget deficit below 3.0 percent of the GDP. As the true picture of the government finance became known, the prices of Greek government bonds began to fall sharply, prompting panic selling among international investors, threatening the sovereign defaults.

Several years into the crisis, the Greek government debt stands at around 180 percent of GDP and the jobless rate among youth is above 50 percent. The country’s GDP declined by about 25 percent. Severe austerity measures, such as sharply raised taxes and much reduced pension benefits, were imposed on Greece as conditions for the bailouts arranged by the EU, IMF, and the European Central Bank. In addition, people were allowed to have only restricted access to their bank deposits, to prevent bank runs. Opinion polls indicate that the majority of people in Germany, the main creditor nation for Greece, prefer the Greek exit from the euro zone, popularly called Grexit, while some people in Greece are demanding Grexit themselves and restoration of the national currency, the drachma.

Discussion points: (i) the root causes of the Greek predicaments, (ii) the costs and benefits of staying in the euro zone for Greece, (iii) the measures that need to be taken to keep Greece in the euro zone in the long run if that is desirable, (iv) If you were a disinterested outside advisor for the Greek government, would you advise Grexit or not? Why or why not?

Answer 1

1) The root cause of Greek predicaments, as inferred from the passage, is the selfish attitude of the European leaders for political gains. I consider this as the root cause because the leaders gave permission to Greece to enter the Euro zone without checking the fact that whether Greece satisfies the conditions for entry.

2)The costs incurred by Greece for staying in Euro zone was heavy, probably larger than the benefits. During the initial stages, Greece had benefits as it received funds at very low rate of interest. Thus the Government, the households and the firms received plenty of funds resulting in increased credit growth. But the growth did not last long and the government revealed that the country's budget deficit stood at 12.7% in 2009, far exceeding the EU's guidelines for maintaining a budget deficit below 3.0% of GDP. The reasons for this includes increased corruption in the government and lack of an efficient tax collection system and may be extravagant spending from the part of government. As a result, price of Greek government bonds start falling affecting the investor sentiments negatively. Soon the country faced ts first bailout in 2010.

3) Strict measures need to be taken by the EU to bring stability to the Greece economy. Taxes should be raised in order to reduce spending by the people, expenditure from the part of the government for the people should also be reduced, domestic consumption must be increased rather than depending on imports.

4) As an outsider I would not suggest a Grexit because, even before joining the EU the condition of Greece was not better. Political unrest always prevailed in Greece. I would say that there existed a tussle between monarchy or dictatorship and a republican form of government. Finally in 1975 parliamentary republic was established in Greece. Even after its entry into EU,corruption and inefficient governance existed. The result of this was, they had to adhere to severe austere measures a conditions for bailouts arranged by IMF, EU and European Central Bank. The control or watch of a higher authority or organisation will help in restoring stability to the economy. The mistake was that EU should have made the Greece economy eligible enough for entry into the zone before giving it the permission to do so.